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Firm and Technology Dynamics in the Short- and Long-Run

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Firm and Technology Dynamics in the Short- and Long-Run Firm and Technology Dynamics in the Short- and Long-Run A Macroeconomic Model for Research and Innovation Policy Evaluation Benedetti Fasil, C. Impullitti, G. Licandro, O. Sedlá£ek, P. 2020 EUR 30242 EN This publication is a Technical report by the Joint Research Centre (JRC), the European Commission's science and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication. For information on the methodology and quality underlying the data used in this publication for which the source is neither Eurostat nor other Commission services, users should contact the referenced source. The designations employed and the presentation of material on the maps do not imply the expression of any opinion whatsoever on the part of the European Union concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Contact Information Name: Cristiana Benedetti Fasil Address: European Commission, Joint Research Centre, Rue Champ de Mars 21, 1050 Brussels, Belgium Email: [email protected] Tel.: +44 0229 91111 EU Science Hub https://ec.europa.eu/jrc JRC120871 EUR 30242 EN PDF ISBN 978-92-76-19284-8 ISSN 1831-9424 doi:10.2760/903763 Luxembourg: Publications Office of the European Union, 2020 © European Union, 2020 The reuse policy of the European Commission is implemented by the Commission Decision 2011/833/EU of 12 December 2011 on the reuse of Commission documents (OJ L 330, 14.12.2011, p. 39). Except otherwise noted, the reuse of this document is authorised under the Creative Commons Attribution 4.0 International (CC BY 4.0) licence (https://creativecommons.org/licenses/by/4.0/). This means that reuse is allowed provided appropriate credit is given and any changes are indicated. For any use or reproduction of photos or other material that is not owned by the EU, permission must be sought directly from the copyright holders. All content © European Union, 2020 How to cite this report: Cristiana Benedetti Fasil, Giammario Impullitti, Omar Licandro and Petr Sedlá£ek, "Firm and Technology Dynamics in the Short- and Long-Run: A Macroeconomic Model for Research and Innovation Policy Evaluation", EUR 30242 EN, Publications Office of the European Union, Luxembourg, 2020, ISBN 978-92-76-19284-8, doi:10.2760/903763, JRC120871. Contents Acknowledgements................................................................................................................................................................................................. 1 Abstract......................................................................................................................................................................................................................... 2 1 Introduction......................................................................................................................................................................................................... 3 1.1 Literature review..................................................................................................................................................................................... 4 2 Model...................................................................................................................................................................................................................... 5 2.1 Household preferences and choices............................................................................................................................................ 5 2.2 Technology adoption, firm-specific productivity and growth ........................................................................................ 6 2.3 Firm behavior............................................................................................................................................................................................ 6 2.4 The firm distribution, market clearing, balanced growth and equilibrium............................................................. 8 3 Parametrization ................................................................................................................................................................................................ 10 4 Results.................................................................................................................................................................................................................... 10 4.1 Higher R&D tax credits........................................................................................................................................................................ 12 4.1.1 Partial equilibrium........................................................................................................................................................................ 12 4.1.2 General equilibrium..................................................................................................................................................................... 12 4.1.3 Heterogeneous effects of homogeneous policies...................................................................................................... 13 4.1.4 Robustness....................................................................................................................................................................................... 15 4.2 Lower corporate taxes......................................................................................................................................................................... 15 4.3 Lower financial frictions..................................................................................................................................................................... 16 5 Taking stock and future research........................................................................................................................................................... 16 5.1 Labor supply and firm entry elasticities.................................................................................................................................... 16 5.2 Technology investment and growth............................................................................................................................................. 16 5.2.1 Innovation......................................................................................................................................................................................... 17 5.2.2 Balanced growth........................................................................................................................................................................... 17 5.3 Further extensions ................................................................................................................................................................................. 17 5.3.1 Innovation policy and the business cycle........................................................................................................................ 17 5.3.2 Granular policies ........................................................................................................................................................................... 18 6 Conclusion............................................................................................................................................................................................................ 18 A Solution method............................................................................................................................................................................................... 19 A.1 Solving for the steady state without aggregate uncertainty......................................................................................... 19 A.2 Solving for the equilibrium with aggregate uncertainty................................................................................................... 19 B Details of firms' first order conditions................................................................................................................................................. 20 C Robustness .......................................................................................................................................................................................................... 20 i Acknowledgements We are grateful to colleagues in the JRC that contributed with feedback on the work. In particular we would like to acknowledge Miguel Sanchez Martinez, Javier Barbero Jimenez, Filippo di Pietro, Aurelien Genty, Peder Christensen and Xabier Goenaga Beldarrain. We would also like to thank Roberto Martino and Julien Ravat from DG RTD for their comments. Authors Cristiana Benedetti Fasil, European Commission, Joint Research Centre, Brussels, Belgium Giammario Impullitti, University of Nottingham, UK & CEP-LSE Omar Licandro, University of Nottingham, UK & IAE-CSIC and Barcelona GSE Petr Sedlá£ek, University of Oxford, UK, & CFM-LSE, CEPR 1 Abstract We develop a dynamic stochastic general equilibrium
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